1. 1 Ravi Vatrapu vatrapu@cbs.dk Online Consumer Decision Making-2 Mishra, S., & Olshavsky, R. (2005). Rationality Unbounded: The Internet and Its Effect on Consumer Decision Making. Chapter 17 of Online Consumer Psychology. Course Portal: http://www.itu.dk/~rkva/2011-Spring-EB22http://www.itu.dk/~rkva/2011-Spring-EB22 Facebook: http://www.facebook.com/group.php?gid=133258548012http://www.facebook.com/group.php?gid=133258548012 Etherpad: http://ietherpad.com/7y3drhMCnqhttp://ietherpad.com/7y3drhMCnq Thursday, 03-Mar-2011 EB22: Online Marketing: Lecture 13 Auditorium 4, ITU, Copenhagen, Denmark

2. Neoclassical Rational Model of the Consumer Three main assumptions: 1.Perfect knowledge about possibility sets 2.Transitivity of preferences 3.Existence of a scheme of preferences for all available alternatives 2

3. Simon’s Bounded Rationality Decision-making is Satisficing rather than Optimizing Three main assumptions: 1.Limited Knowledge 2.Information is costly to collect and store 3.Economic behavior requires trail-and-error search process 3

4. Consequences of Bounded Rationality  Cognitive Effort vs. Decision Accuracy tradeoffs  Less-accurate heuristics over optimal choice rules  Task Effects  Time pressure  Number of alternatives and number of attributes  Response modes  Context Effects  Similarity of alternatives 4

5. Decision Heuristics  Weighted Additive Rule (WADD)  Equal Weight Rule (EQW)  Elimination-By-Aspects (EBA)  Lexicographic (LEX) 5

6. Weighted Additive Rule (WADD): Example  Textbook: Table 17.2 (p. 365)  Alternative A: (6x4) + (4x7) + (2x4) = (24) + (28) + (8) = 60  Alternative B = 44  Alternative C = 54 6 Picture QualityVersatilityConvenience Weights642 Alternative A474 Alternative B272 Alternative C463

7. Equal Weight Rule (EQW): Example  Same as Weighted Additive Rule (WADD) but with Equal Weights  Alternative A = 4 + 7 + 4 = 15  Alternative B = 2 + 7 + 2= 11  Alternative C = 4 + 6 + 3 = 13 7 Picture QualityVersatilityConvenience Weights444 Alternative A474 Alternative B272 Alternative C463

8. Elimination By Aspects (EBA): Example  Form cutoffs for the most important attribute  Eliminate all products with attributes not meeting the cutoff  Repeat till only one product remains  Select Picture Quality First  Alternative B is eliminated  Select Versatility Next  Alternative C is eliminated and Alternative A is selected 8 Picture QualityVersatilityConvenience Cutoff374 Alternative A474 Alternative B272 Alternative C463

9. Lexicographic (LEX): Example  Select most important attribute  Select the product with the best value on the attribute  Resolve ties by selecting the next important attribute  Select Picture Quality First  Alternative A and Alternative C are selected  Select Versatility Next  Alternative C is eliminated and Alternative A is selected 9 Picture QualityVersatilityConvenience Alternative A474 Alternative B272 Alternative C463

10. WADD & EQW  Compensatory  Utility loss in one attribute can be traded off with utility gain in another attribute of the same product  Alternative-based  All alternatives are considered 10

11. EBA & LEX  Non-Compensatory  Utility loss in one attribute CAN NOT be traded off with utility gain in another attribute of the same product  Attribute-based  Only specific set of attributes are considered 11

12. EBA & LEX  Non-Compensatory  Utility loss in one attribute CAN NOT be traded off with utility gain in another attribute of the same product  Attribute-based  Only specific set of attributes are considered 12

13. Internet’s Effect on Decision Heuristics 13 Impact on all Four Components of Consumers’ Choice Space: 1.Evaluation Strategies 2.Evaluative Criteria 3.Consideration Set 4.Image of Alternatives within the Consideration Set

14. (Un)Bounded Rationality 14 Authors’ Claim: The Three main assumptions might not be valid 1.Limited Knowledge 2.Information is costly to collect and store 3.Economic behavior requires trail-and-error search process

15. Discussion 15 Exercise 11: In-class small group exercise http://cat.xula.edu/thinker/decisions/heuristics/ Post on Etherpad: http://etherpad.com/DqW4MqxTK4